Toward a U.S. cryptocurrency: Stablecoin as a bridge?

The remarkable rise of Bitcoin, Ethereum, and hundreds of other so-called cryptocurrencies is driving massive changes in the way we process financial transactions. While technology has nominally improved antiquated processing and clearing systems used by the Fed and commercial banks, Bitcoin and its ilk offer the potential to revolutionize them. Yet Bitcoin itself is not a candidate to replace the dollar for reasons we discussed last week. The introduction of an official U.S. digital version of the dollar is gaining support among economists and policymakers, but wide adoption is at least a few years down the road.

A possible transition path involves a variant of established cryptocurrencies known as Stablecoins, which attempt to address the most troublesome deficiencies of Bitcoins and their brethren: instability.

Stable value coins or Stablecoins were first issued in 2014 to address the high volatility in cryptocurrencies that rendered them unsuitable for routine payment transactions. Bitcoin itself has no intrinsic value; it exists only as a digital record and is only worth what other parties collectively believe it to be worth. Stablecoins, on the other hand, are backed by deposited collateral, much like the U.S. dollar was once backed by gold deposits. Tether, the largest Stablecoin issuer, has issued $68 billion worth of its cryptocurrency (symbol USDT), but holds approximately the same value in highly liquid securities like U.S. Treasury bonds and commercial paper (short-term high quality corporate loans) in reserve.

Tether and other Stablecoin issuers promise dollar for dollar convertibility, allowing buyers to exchange cash into cryptocurrency and vice versa at a stable $1 rate. Bitcoin users must contend with sometimes wildly varying exchange rate risk when moving between dollars and cryptos, much like converting U.S. dollars into Mexican pesos, British pounds, or Indonesian rupiah. By eliminating the exchange risk, Stablecoins could function as a bridge to true U.S. digital dollars. At least in theory.

As Stablecoins gain acceptance, regulators are increasingly concerned about potential risks if too many holders decide to cash in all at once, triggering an electronic equivalent of a run on the bank. While Stablecoins are generally secured by relatively high-quality assets like short-term bonds, the 2008 financial market freeze demonstrated that even these secure assets can be hard to sell quickly on demand during a crisis. An ensuing collapse in convertibility of Stablecoins into Greenbacks could set off another financial meltdown.


Stable value crypto coins are a form of private money created outside the established bank regulatory system. It is important to recognize that roughly 90% of the money in circulation in the United States is also “private,” created within the commercial banking system through lending activities. Bank account holders have confidence that their deposits are secure and the dollar is stable because the system is tightly regulated, depositors are insured by the FDIC, and the Federal Reserve stands ready to provide liquidity should a bank need to meet withdrawal demands in excess of legally mandated reserves.

Stablecoins (or any other flavor of cryptocurrency) are mostly unregulated, or at best lightly regulated at the state level. But they could serve as a bridge to a full-fledged Fed-issued Central Bank Digital Currency (CBDC) once brought within a framework of oversight that would minimize the risk of financial disruption during times of economic stress.

Regulating Stablecoin issuers like banks is the most likely path under consideration. Stablecoin recently got into a jam for misleading investors about the quality and value of its reserve holdings, and for resisting full disclosure of its securities portfolio. To be truly viable, the collateral held in reserve must be completely transparent, highly liquid, and subject to regulation by the Federal Reserve. However, digital coin sponsors are not banks, and current bank regulations would be an ill fit requiring substantial innovation as well as Congressional action.

Another substantive obstacle is the potentially negative impact on existing banks. Adoption of a truly digital currency like Stablecoins or a Federal Reserve CBDC would subordinate the role of commercial banks as intermediaries, reducing costs to consumers but prompting stiff opposition from the banking industry. Any regulatory framework would likely make some offsetting concessions to banks, in part erasing some of the cost efficiencies presumably driving digitization in the first place.

Both the Federal Reserve and the Biden Administration are nearing the completion of proposed frameworks to regulate Stablecoins, and much hard work remains to be done, but widespread adoption of digital currencies is inevitable. En route to an official Fed-issued crypto dollar, a well-regulated version of Stablecoins could function as the onramp.

Christopher A. Hopkins is a Chartered Financial Analyst in Chattanooga.


About John 14995 Articles
Bink LLC: bitcoins.inc bitcoinwallet.inc 5g.inc 5g.llc binkhost.com

Be the first to comment

Leave a Reply